Another side to the coin
We all want the rand to be stronger, but there is a downside.
A few columns ago I discussed how an exchange rate impacts on transport operators. Certainly, the lag between the exchange rate and the pass-through into new-vehicle inflation shows the pitfalls of a weaker rand on fleet replacement.
In recent months, the rand has shown a different trend – positive political developments together with an increased appetite for emerging market assets have pushed the rand into stronger territory.
A stronger rand is helpful in many ways. For one, the petrol price falls. Despite oil price increases towards the end of 2017, a price adjustment occurred that led to a stronger rand and lower prices at the pumps, which would have increased margins for fleet operators.
Further, the subsequent lower inflation meant a decrease (theoretically, at least) in the interest rate, making credit cheaper and financing relatively easier. We also know that a stronger rand makes for lower prices of vehicles and components, which brings down the cost of replacing fleets.
Therefore, it would certainly seem that in many ways a stronger rand appeals to the transport industry. However, in economics there is always a converse side to consider…
The latest freight transportation data shows that mining freight accounted for a significant 25 percent of total freight. With the economy still in a weak growth recovery mode, freight activity has had to rely on the performance of manufacturing, mining and agriculture to carry growth in the sector.
As a result of the stronger rand, the value of exports dropped. The latest value of mining sales can attest to this. The latest mining sales data shows a fall of 1,4 percent from the previous year.
Despite increases in the prices of many of our major mining exports, the stronger rand pushed the value of exports down. With mining sales down, mining houses may choose to stockpile commodities while the value of exports falls.
In a situation like this, it is likely that freight transport will see a lesser contribution from mining, which will place downward pressure on total freight.
As an economist, I am often asked whether the rand is at the correct level. As shown here, there is always more than one factor to consider.